Monday, 24 February 2014

The hospitality industry, and the pub sector in
particular, is populated by "big personalities", none less than Tim
Martin, founder and CEO of the ubiquitous JD Wetherspoon (JDW) chain of managed
pubs. So when these captains of industry speak out their words are taken note
of and afforded a level of respect concomitant with their standing. But we
should be cautious about accepting all their promulgations without applying a
critical eye. In the latest edition of the JDW "Wetherspoon News" Mr
Martin attempts to analyse why so many pubs have closed their doors for the
last time in the past decade.

“Who killed
Cock Robin? I, said the sparrow, with my bow and arrow, I killed Cock Robin…”
Unlike the sparrow, no one has stepped forward to accept blame for the killing
of 10,000 pubs which have shut down in the last ten years – about 15% of the
total number of pubs in the country. A large amount of blame can be attributed
to the VAT inequality between pubs and supermarkets. Supermarkets pay no VAT on
food sales, whereas pubs pay 20%, allowing supermarkets to subsidise their drinks
prices with their massive ‘tax break’. Another huge factor relates to the
business rates disparity between pubs and supermarkets. The average pub pays
around 6% of its sales as rates. This amounts to about 15p a pint, believe it
or not. Supermarket chain Morrisons’ chief executive, Dalton Philips, told the Financial Times (11 July 2013) that his company paid £240 million of business rates in
the previous year. Morrisons’ accounts for the year in question (to February
2013) show sales of £18.116 billion. Supermarkets, therefore, appear to be
paying rates somewhere in the region of 1.32% of their sales. So, a pint
purchased in a supermarket for about £1.25 will have a business rates cost of
roughly 1.65p. This analysis clearly demonstrates that each pint purchased in a
pub has approximately nine times the level of business rates as a pint
purchased in a supermarket. You don’t have to be Mark Carney, governor of the
Bank of England, George Osborne or Ed Balls to work out the economic
consequences of the disparity in VAT and rates between pubs and supermarkets."

Can't fault you there Tim, VAT and Business
rates in their current incarnations undoubtedly disadvantage pubs compared to
other retail businesses, for despite all the mythology surrounding our national
watering holes, they are just that, retail businesses, it's just their stock in
trade is food and alcohol and not other commodities. Jacques Borel has been
campaigning, to mixed success, throughout the EU to bring VAT rates down for
the hospitality industry citing the advantages of increased tax revenues, more
employment and enhanced inward investment as the benefits to national
exchequers. Unfortunately it seems the current occupant of No. 11 Downing
Street has firmly set his face, and his administration's, against this much
needed tonic for the British economy and hospitality industry, despite hard
evidence from countries which have adopted this progressive tax regime. Perhaps
it was too much to think reducing beer duty by a penny a pint and scrapping the
beer duty escalator last year was a herald for a more sympathetic (one could
say enlightened) approach to taxation for our benighted industry.

"However,
there are a lot of other tax disparities in addition – for example, the
coalition government increased taxes on fruit machines and introduced a
‘late-night levy’, taxes which apply only to pubs, further increasing their
economic disadvantage. I doubt that the government or the treasury has
malicious intentions towards pubs, but I strongly suspect that they haven’t
thought through the financial consequences of their actions, a malaise which also
afflicted the previous Labour government. No thoughtful or sensible economist,
presented with this information, would deny the huge impact of the tax system
on pub closures."

Again, not a lot to argue with there, when as I
write we still endure the second highest level of alcohol duty in the EU.

"However,
the situation is complex and there are indeed other factors, less important
overall, which have contributed to the demise of so many pubs. The main
additional reason for pub distress is the high level of debt assumed by some
pub companies in the years running up to the credit crunch. Two of the main
architects of the debt-fuelled pub boom were Guy Hands, formerly of Japanese
bank Nomura, and Hugh Osmond, a financier who has been involved in
substantial debt-raising exercises in respect of public companies. In essence,
Hands and Osmond bought the large tenanted pub estates of the major brewers,
using borrowed money, and then hiked up the rents and the beer prices paid by
the tenants. As a result of the increased income which they generated, they
were able, in effect, to remortgage the pubs, extracting tens of millions of
pounds of ‘profit’ for themselves. The problem, in my opinion, is that the
so-called ‘business model’ which they helped to pioneer was unsustainable – and
thousands of tenants have gone to the wall – and thousands of pubs have closed.
Not all pub closures were formerly tenancies, but very many were. After Hands,
Osmond and their acolytes and imitators sold out, the majority of the pubs in
the tenanted estates ended up with public companies called Enterprise Inns and
Punch Taverns. They continued to buy pubs and increase debt (as well as
continuing to increase rents and beer prices for tenants) right up until the
credit crunch hit. When the individual licensees/tenants started to suffer
between the hammer of high rents and beer prices and the anvil of the tax-subsidised
supermarkets, unprecedented numbers of publicans went bankrupt – and the Enterprise and Punch shares plummeted on the stock market to a
fraction of their former value."

Bang on the money, but let's not forget the
infamous Giles Thorley who trousered a reported £35 millions from his time at
the helm of the now sinking Punch Taverns.

"A
depressing aspect of this sad chain of events has been the attitude of the former
pub Titans to the plight of the tenants. Guy Hands and Hugh Osmond, joined
recently by former Enterprise Inns’ boss Ted Tuppen, have said nothing at all
about the tax disparity with supermarkets which weighs even more heavily on
pubs than their own financial engineering. Yet they have been exceptionally
vociferous in criticising high tax rates which apply to them personally. Guy
Hands, in high dudgeon, removed himself some time ago to the tax haven of Jersey. Hugh
Osmond and Ted Tuppen remain residents, but have been shouting from the
rooftops at the injustice of the Labour Party’s proposal to increase the top
rate from 45 to 50%. There is a justifiable argument for a reasonable top rate
of tax which encourages hard work – Britain did not benefit from the Rolling Stones hiding from the
taxman in the south of France in the 1970s. However, the disregard of the financial
engineers for the plight of their tenants and their egocentric concentration on
their own positions, dressed up as national concern, might even have caused
Maggie Thatcher to side with Ed Balls.

How true Tim, although I doubt the late
(not)lamented Baroness would go as far as that, let's face it, it was under her
administration the ill-conceived Beer Orders came into force, which paved the
way for the likes of Hands, Osmond, Thorley, Tuppen et al (the agents and brokers
of one of the biggest property bubbles in British business history).

What Tim neglects to mention are the societal
changes, engineered by government, which have occurred over the last decade too,
for instance the introduction of the ban on smoking in public places in 2007
which in spite of the health lobby's assurances that pubs would fill with
non-smokers who had previously eschewed our smoke-filled pubs, must have been a significant factor in the closure of many "land-locked" pubs which simply couldn't provide outside facilities for smokers. And I would wager, there isn't a pub in the land which permitted smoking prior to the ban that hasn't seen a drop off in trade as smokers remain in the comfort of their own homes drinking cheap supermarket tinnies.

Tim also neglects to mention, not surprisingly,
his own company's part has to play in the demise of many independent pub
businesses throughout the land. Whilst one tries not to be a "poppy reaper"
and lambast the entrepreneurial skill of self-made tycoons, it is somewhat
disingenuous of Mr Martin to omit his own creation's contribution to the
decline of the national pub estate. For, every time a new "Spoons" is
announced independent pub landlords in the vicinity must shudder as the
prospect of the lowest common denominator comes crashing into their local
micro-markets. Many a publican will be able to tell you of the devastating
effect a new JDW site has on their business as the "pile it high, sell it
cheap" business model adopted by Tim Martin is the economic equivalent of
a sink hole opening in the middle of their neighbourhood.

Note to self, go to my local independent pub tonight (not usual on a Monday) and have a pint, for if we all did that even just once a week instead of drinking in managed chains (or quaffing on the sofa) we might help reverse the seemingly inexorable decline of the pub trade in this country.

Thursday, 30 January 2014

Regular readers will know I have been somewhat silent from the blogosphere over the last couple of months and part of the reason is increased work elsewhere (on consultancy work and the How To Run A Pub website) and partly due to my increased frustration over the Government's seeming inability (or more likely) lack of political will to deal with the pubco/tenant relationship.

Even though there's a new parliamentary tradition, the annual January opposition debate on the pubcos now in its third year, and despite a staggering 9,000 submissions to its own consultation of regulation for the tenanted/leased pub industry (or as Vince Cable et al say because of it) no government response has been forthcoming.

Even the dullest of nuMPty must realise there is something fundamentally wrong with the current system when one reads of Greene King and its dealings with its pubs both let out and directly managed by themselves.

Former Greene King tenants Dominic McCartan and Tony Leonard, who have had enormous success runaway success at The Snowdrop in Lewes, a
backstreet freehold acquired from Punch Taverns four years ago, publicly fell out with Greene King and surrendered the leases of their former Brighton pubs, The Hop
Poles and The Eagle, after running them for 12 years, in March 2012, after
Greene King refused all attempts to negotiate rents that had become
unsupportable.

Under their management, turnover at The Hop Poles rose from
£2,000 a week when McCartan took it on in 1999, to an impressive £50,000 a week ending August 2008, making it the highest trading pub per square
foot in the Greene King estate. At the time of leaving, rent at The Hop Poles
had risen to over £79,000 (114% of divisible balance) plus 10% of turnover for
free-of-tie on all but one Greene King product. This fixed rent plus the
turnover rent amounted to 199.99% of divisible balance, the couple claimed.

But in true cut their own nose off to spite their corporate face style, Greene King took the pubs back. Although I can't find any details relating to the current levels of trade at these pubs, I'd be happy to put a tenner down on them not trading at anywhere near those levels now.

In stark contrast is Greene King's experience with The Golden Fleece in Queen Street in the City of London, trading
under the Capital Pub Company banner, which has seen nil uplift in rent on review thanks to
agent AG&G, who's director Anthony Alder says:

“Both Greene King and the owners knew that the venue was
experiencing strong demand and buoyant trading, but that wasn’t enough on its
own to justify an increase in the rent,”

“We were able to prove that buildings with an A3 designation were not seeing any
increase in value in that location, so there was no reason for an increase. This
was accepted and the result was a nil uplift. Current market knowledge once
again proved crucial.”

Which brings me back to the beginning, surely what's sauce for the goose should be sauce for the gander? A multi-billion pound company takes advantage of even it's most successful of tenants (who no doubt thought long and hard about walking away from 12 years hard graft as the rent being sought by their landlord was unsustainable) whilst bleating to its own landlord that good trading figures weren't enough to pay more rent... really, you couldn't make this shit up even if you had a Pullitzer on the mantelpiece. And Greene King wonder why they're lampooned and reviled in equal measure as "Greedy King" by many in the pub trade.

Vince... pull yer finger out and get the pubco mess sorted as the price of my medication has soared in the last few years and I'm now having a cost of sanity crisis!